The Future of Risk: Energy

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future liabilities

“Companies are looking to technology to help reduce costs through innovation, developing methods to carry out substantial work offshore and in a shorter space of time.”

Our Experts

Chris Graham
Head of Offshore Decommissioning and Constrcution
Global Energy

Vimal Patel
Executive Director
Offshore Construction Energy

Michael Carr
Chief Commercial Officer

Due to the huge number of offshore oil and gas fields developed over the last few decades, a growing number are now approaching the end of their operational life and we expect decommissioning to increase and evolve at a rapid pace in the coming 10-20 years. The decommissioning industry is focused on developing cost-effective methods to retire installations that were in some cases not designed for removal, while working within often complex regulatory frameworks.

While it is possible to draw comparisons between construction and decommissioning coverage and projects, construction all-risk (CAR) insurance tends to focus on the repair or replacement of project works following a physical loss or damage to the asset. The aim of decommissioning coverage is to restore the site to the condition it was in before construction started - or the most environmentally sound alternative. Consequently, while removal of wreck, damage to third parties, pollution and liability exposures are to be considered from a risk perspective, firms must also take into account potentially significant environmental and social factors.

Conditions mean there is already a global initiative to reduce costs associated with decommissioning, with the UK working towards a 35% cost reduction target. Apart from potential tax breaks, there is little monetary incentive to spend more on decommissioning, and as such operators are looking for ways to reduce costs.

Some assets are so old and large that there are very few vessels capable of moving them, with decommissioning costs consequently very high. Other sites are in challenging environments or are particularly sensitive from an environmental perspective. Companies are looking to technology to help reduce costs through innovation, developing methods to carry out substantial work offshore and in a shorter space of time.

Geographical variation

Firms entering into decommissioning need to closely consider operational and environmental requirements set out by the state, with significant variation depending on the territory. The North Sea, Australia and the Gulf of Mexico are perhaps the most mature markets, with decommissioning plans required by governments a relative formality. In less developed markets however, there is scope for more onerous demands. And in a number of jurisdictions, NGO pressure is a significant concern – with some lobbying for complete removal from the seabed, even when it may be more beneficial for the environment to leave particular infrastructure in situ.

A significant component of more mature regulatory regimes is the requirement that energy firms retain adequate funds on their books to cover decommissioning costs. With companies facing potentially significant future liabilities linked to decommissioning, they need to evidence there is sufficient security set aside to cover these costs. This tends to take the form of a guarantee or a capital allocation, which limits liquidity. Insurance options are available to reduce the impact of these capital constraints on financial performance and firms are increasingly turning to the insurance market to limit their financial obligations.

Uncertain future

When considering future risk, firms must contend with political decisions that can affect their obligations when it comes to decommissioning redundant offshore assets. Decommissioning can be complex and costly, and financial projections are based on what the regulatory environment dictates at the time. If the political landscape changes, this could alter exposures and consequential cost significantly. A changing regulatory environment could also mean an increased financial obligation and a need to obtain more security.

If there is a deep and prolonged fall in oil prices due to COVID-19, this could negatively affect the economic value of assets and bring decommissioning activity - and cost - forward. Energy firms have already reduced activity, with some shutting down offshore assets, to avoid financial challenges. If assets are no longer profitable, decommissioning could be brought forward from 10 years to 5, or even sooner. The question is whether the industry can move at the speed required to meet the evolving obligations. When there is very little discretionary money on the budget, the onus will be on decommissioning specialists to provide commercially innovative solutions.

Risk transfer

Firms are generally proactive in meeting the long and short-term challenges decommissioning poses. In terms of the impact on balance sheets, firms can’t avoid their financial obligations, but there may be scope to reduce it by collaborating closely with the relevant authorities and local jurisdictions. They should also utilise financial instruments to provide security and team-up with an experienced broker to maximise risk transfer opportunities.

There are insurance products for removal of wreck, physical damage, third party liability, and plug and abandonment (P&A) in the conventional energy market. There are also insurance solutions for off balance sheet surety provisions that can provide a way to meet those demands and these vary significantly dependant on jurisdiction, operator and timing.

There is also a huge amount of innovation currently underway to add value. The decommissioning market is relatively young, and - there is scope for considerable evolution in how things are currently done. P&A and decommissioning cost overruns are areas where Aon sees considerable opportunity for product innovation, which would help reduce the contingency placed in decommissioning budgets and free-up balance sheet capital.

Decommissioning: a growing imperative
5 years

The impact of COVID-19 is likely to be significant. Conditions may force firms to curtail their investments, resulting in the decommissioning of certain assets being brought forward.

Innovation in risk transfer will predominantly be focused on products like cost overrun, which would help to reduce balance sheet costs and increase liquidity during a particularly challenging period for the industry.

5-10 years

Emerging markets regulation linked to decommissioning will become more aligned with developed markets – with increased standardisation, consistent regulation and greater cost certainty for firms.

10 years

There will be significant technological advancements, including decommissioning hubs, more vessels capable of handling assets, and more competition as the decommissioning needs of the sector grow over the coming decade.

There is the potential for significant cost reductions relating to cement alternatives for P&A, which will help to deliver long-lasting seal solutions.

10-20 years

Decommissioning will be firmly part of the installation’s lifecycle - with all assets having clear plans for decommissioning from the offset – aiding long-term budgeting and projections.

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